Firm Financing in Chile after the 2014-15 Tax Reform : Debt or Equity?

This paper analyzes the effects of the 2014-15 Chilean tax reform on firms' incentives to retain earnings and finance their operations with equity versus debt. The analysis comprises a comparison with the situation of the pre-reform period, an...

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Main Author:	Hernandez T., Leonardo
Format:	Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2016
Subjects:	tax reform debt equity retained earnings income tax rate investment incentives
Online Access:	http://documents.worldbank.org/curated/en/2016/10/26867940/firm-financing-chile-after-2014-15-tax-reform-debt-or-equity http://hdl.handle.net/10986/25305

id	okr-10986-25305
recordtype	oai_dc
spelling	okr-10986-253052021-04-23T14:04:29Z Firm Financing in Chile after the 2014-15 Tax Reform : Debt or Equity? Hernandez T., Leonardo tax reform debt equity retained earnings income tax rate investment incentives This paper analyzes the effects of the 2014-15 Chilean tax reform on firms' incentives to retain earnings and finance their operations with equity versus debt. The analysis comprises a comparison with the situation of the pre-reform period, and draws some conclusions about firms' valuation. The approach consists of analyzing the effects of the tax reform on total taxes paid and cash flows received by investors. Although the final effects are specific to the firm and investor, as they depend on the firm's dividend payout ratio and each investor's personal income tax rate, the results show that in general the reform reduced the value of firms and lessened the incentives to retain earnings. The simulations show that the majority of firms would choose the accrual or "attributed" tax–based system. However, if the latter is not permitted, firms will choose debt over equity. The cash-based or semi-integrated system becomes the preferred option only when elusion (or tax avoidance) is possible. 2016-11-01T16:25:16Z 2016-11-01T16:25:16Z 2016-10 Working Paper http://documents.worldbank.org/curated/en/2016/10/26867940/firm-financing-chile-after-2014-15-tax-reform-debt-or-equity http://hdl.handle.net/10986/25305 English en_US Policy Research Working Paper;No. 7861 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research Latin America & Caribbean Chile
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English en_US
topic	tax reform debt equity retained earnings income tax rate investment incentives
spellingShingle	tax reform debt equity retained earnings income tax rate investment incentives Hernandez T., Leonardo Firm Financing in Chile after the 2014-15 Tax Reform : Debt or Equity?
geographic_facet	Latin America & Caribbean Chile
relation	Policy Research Working Paper;No. 7861
description	This paper analyzes the effects of the 2014-15 Chilean tax reform on firms' incentives to retain earnings and finance their operations with equity versus debt. The analysis comprises a comparison with the situation of the pre-reform period, and draws some conclusions about firms' valuation. The approach consists of analyzing the effects of the tax reform on total taxes paid and cash flows received by investors. Although the final effects are specific to the firm and investor, as they depend on the firm's dividend payout ratio and each investor's personal income tax rate, the results show that in general the reform reduced the value of firms and lessened the incentives to retain earnings. The simulations show that the majority of firms would choose the accrual or "attributed" tax–based system. However, if the latter is not permitted, firms will choose debt over equity. The cash-based or semi-integrated system becomes the preferred option only when elusion (or tax avoidance) is possible.
format	Working Paper
author	Hernandez T., Leonardo
author_facet	Hernandez T., Leonardo
author_sort	Hernandez T., Leonardo
title	Firm Financing in Chile after the 2014-15 Tax Reform : Debt or Equity?
title_short	Firm Financing in Chile after the 2014-15 Tax Reform : Debt or Equity?
title_full	Firm Financing in Chile after the 2014-15 Tax Reform : Debt or Equity?
title_fullStr	Firm Financing in Chile after the 2014-15 Tax Reform : Debt or Equity?
title_full_unstemmed	Firm Financing in Chile after the 2014-15 Tax Reform : Debt or Equity?
title_sort	firm financing in chile after the 2014-15 tax reform : debt or equity?
publisher	World Bank, Washington, DC
publishDate	2016
url	http://documents.worldbank.org/curated/en/2016/10/26867940/firm-financing-chile-after-2014-15-tax-reform-debt-or-equity http://hdl.handle.net/10986/25305
_version_	1764458916102537216

Firm Financing in Chile after the 2014-15 Tax Reform : Debt or Equity?

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